Debt ceiling breach worse than financial crisis, says Lehman Brothers, S&P

A new report from Beth Ann Bovino, chief U.S. economist at S&P Global Ratings, says if the debt ceiling is breached, it would be worse for the U.S. economy than some of the most devastating events of the financial crisis. .

“While we believe the Senate will pass its deal to raise the debt ceiling, the impact of a US government default on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy. economy,” Bovino wrote on Wednesday. .

The debt ceiling, the upper limit of debt the U.S. federal government is legally allowed to accumulate, was technically hit in March. Since then, the Treasury Department used so-called extraordinary measures to prevent a breach and a possible breach of obligations.

Treasury Secretary Steven Mnuchin warned Congress in July that these measures would expire at the end of September, and the Congressional Budget Office estimated The Treasury would run out of options at the beginning of October.

So far, debt ceiling negotiations stagnate. Conservative-leaning Republicans don’t want to raise the debt ceiling without a corresponding spending cut, while Democrats generally favor a sharp hike.

Although the government has some options to avoid a technical default, the economic ramifications would still be immense. A report from the Treasury Department showed that the fight against the 2011 debt ceiling, in which a potential default was avoided at the last minute, had serious repercussions for financial markets and the American economy.

Global uncertainty about the federal government’s inability to pay its debts and the subsequent market reaction would shatter business and consumer confidence, Bovino said, citing the 2011 debt ceiling crisis.

“Businesses don’t want to invest during times of uncertainty, and households are likely to delay spending,” she wrote in the report. “We saw huge effects during the US debt ceiling crisis in the summer of 2011, with consumer confidence hitting a 31-year low in August, and the annualized third quarter

Real GDP

growing by only 0.8%.

Bovino said it would be a double whammy for confidence given that the bill to maintain government funding is also set to expire at the end of September. If a shutdown and default occurred at the same time, it would be a blow to investor, consumer and business confidence in the workings of government.

Excerpt from Bovino’s report:

“With markets somewhat nervous about a possible selective US sovereign default, fears of a threat of shutdown only add to their concerns. The shutdown and the impending debt ceiling combined could significantly hurt business and consumer confidence, as well as the overall economy.The disarray leaves hope for GOP lawmakers to approve a [comprehensive] tax plan, or even our expectation of a modest tax cut, by early next year, now seems like wishful thinking. »

A shutdown alone, Bovino said, would reduce fourth-quarter GDP by 0.2% annualized for each week the shutdown continues.

“In the event of a default, the resulting sudden and unforeseen contraction in current spending could lead to a reduction in government spending of around 4% of annualized GDP,” the economist wrote. “The economy would fall back into a

recession

wiping out much of the progress made by the recovery.”

Congress returns Tuesday from its August suspension. There are 12 days that Congress is in session in September.